If nothing else, then the next few days will make or break the current upmove in the equity market. Either the advance will feed on itself in conjunction with -- and reaction to -- all of the government-generated news, programs, and monetary support designed to lift the economy out of its deep recession, or, alternatively, will reveal itself as a classic, sharp recovery rally that turns out to be a massive Bull Trap prior to another vicious downleg.
Right now, my work is telling me that although the situation feels like the former, I should treat it like the latter-- and prepare for a resumption of the dominant bear market perhaps in a matter of hours. We shall soon find out.
Looking at the 4-hour chart of the S&P 500 e-mini futures contract, the combination of Friday morning's upside break of a significant 1-month down trendline at 849.50 and the prospect of government action on the stimulus plan and TARP 3 in the upcoming hours/days propelled the index sharply higher towards a possible confrontation with a very important prior rally peak established on January 28 at 876.00.
My pattern and momentum work argue for still higher prices in the index and its corresponding ETF, the S&P 500 Depository Receipts (AMEX: SPY).
However, all of the action off of the January 20 low at 797.50 remains countertrend, which when complete should usher in a very nasty downside reversal and resumption of dominant downtrend weakness.
But first things first: Where are the next upside targets from where a peak and downside pivot reversal might occur? Target #1 at 859-862 was met on Friday. Target #2 at 869-873 was touched during the final hour of trading; however, no selling pressure emerged.
Upside continuation Sunday evening into Monday morning that stalls in the 870-873 area, followed by a decline that breaks 858, will be initial indication that the upmove is exhausted. If no such sell-off unfolds, then I will be setting my sights on Target #3 at 883-886, which will imply a hurdle of the 1/28 at 876 and continuation to 883-886 prior the anticipated downside reversal.
